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Exclusive: Amazon and Whole Foods clash over products like Coca-Cola

Six months after acquiring Whole Foods, Amazon (AMZN) is working on reorganizing Whole Foods shelves by first adding Amazon private label products and, soon, it may add popular consumer packaged goods like Coca-Cola. Behind the scenes, this is causing internal debate and disagreements, Yahoo Finance has learned.

When asked if Whole Foods will add “consumer packaged goods like Coca-Cola,” Whole Foods spokesperson Brooke Buchanan said, “As you know, we have really high-quality standards, and those products that you just mentioned don’t meet those quality standards. If there were new products that actually do meet our quality standards, then there’s always that consideration.” Amazon declined to comment.

In June, Whole Foods CEO John Mackey called the marriage with Amazon, “love at first sight.” And the two appear to be in a happy union, with one big announcement after another: price cuts on staples; Amazon Echo devices debuting in stores; and recent free delivery on Whole Foods products for Prime members.

But the honeymoon may be over as Amazon and Whole Foods butt heads over what to stock store shelves with. Would adding Coke sacrifice the healthy, organic image Whole Foods has long held dear?

Adding Coke would signal greater changes

Whole Foods has been known for its strict rules on sourcing products, requiring foods “free of artificial preservatives, colors, flavors, sweeteners, and hydrogenated fats,” according to itswebsite. That rules out Coca-Cola, the household product with artificial preservatives in the secret recipe, and even its healthier diet version.

Amazon’s plan to change Whole Foods’ shelves is a key effort of the e-commerce giant’s initiative to make Whole Foods profitable. Whole Foods same-store sales had been falling for eight consecutive quarters before being bought by Amazon. After Amazon’s takeover, Whole Foods reported a 4.4% increase in sales for the quarter ending Sept. 24, 2017 from a year earlier — the biggest in two years.

While Whole Foods gained an almost cult-like following, it has also been criticized for its limited store offerings, even as retailers like Walmart and Costco have started to sell more organic produce. Whole Foods owns just a 4% share in the total U.S. grocery market, a far cry from Walmart’s 25% and Kroger’s 10%, according to a Susquehanna analyst note last June.

Then Amazon came. As a consumer-centric company, Amazon is leveraging Whole Foods to satisfy customer needs. That has become more urgent after Amazon provides free delivery of Whole Foods groceries for Prime members, who have a large appetite for packaged goods like Coca-Cola and PepsiCo snacks.

“Whole Foods has proved a specialty retailer focusing only on organic food can’t scale and be profitable,” says Brittain Ladd, a retail and supply chain consultant. “Amazon doesn’t want to maintain the status quo. They can’t see people go elsewhere simply because these highly-popular products are not available in Whole Foods.”

Whole Foods resistance

Some employees in Whole Foods are not impressed by the idea of adding products that may be not “organic”.

Amazon could add private label products as soon as March, but the plan of bringing in consumer-packaged goods still faces obstacles from Whole Foods, according to sources familiar with the matter.

“If that does ever happen, it will upset a lot of team members and customers,” a longtime Whole Foods store employee in Austin told Yahoo Finance. “That’s what makes Whole Foods Market different from our competitors.”

But food makers have already started providing healthy alternatives of its products for the Whole Foods. Last year, Bloomberg reported PepsiCo’s Frito-Lay developed organic Doritos marketed under the name “Simply,” which meet all the criteria needed to be sold in Whole Foods. Industry experts said Whole Foods will eventually benefit from larger store selections, since many packaged goods have higher margins and a strong customer base.

“It’s painful, but Whole Foods needs to be put out of the comfort zone,” Neil Saunders, managing director of GlobalData Retail told Yahoo Finance. “There are retailers that can provide high-quality organic food while offer packaged goods, and Amazon is helping Whole Foods in that direction.”

Do you think Whole Foods should carry more consumer packaged goods? Write to Krystal Hu via krystalh@oath.com or follow her on Twitter